The 2012 budget and SMEs

By Manos Schizas, senior SME policy adviser, ACCA

I can’t shake the feeling today that the Chancellor somehow lost a whole page of his Budget speech.  Either that or he’s finally decided to dispense with formalities and treat Budget leaks as official announcements.

To be fair, there was a great deal in this Budget that was positive.

• As a successful UK exporter ourselves, we welcome the Chancellor’s strong anti-protectionist tone, and for what it’s worth we believe it to be sincere
• News that the relief allowance on enterprise investment schemes (EIS) is to be doubled to £200,000 is particularly welcome. The cap on investment under EIS has been raised again to £5m. Successive Governments have been careful to shield equity investment into small businesses from tax to the extent possible, and this move continues in that direction.
• However, changes to the profile of recipient firms are slightly troubling: qualifying companies can now have up to 250 employees (instead of the previous 50) and can have assets before investment of £15m (up from £7m) or £16m post-investment (up from £8m). This is a bit of a problem because equity investors, from business angels to VC funds, have been steadily drifting towards investments in bigger and more mature companies over the last few years. This change to the incentive scheme will accelerate this process.
• Targeted support for the creative industries through tax breaks plays to the UK’s strengths and will be welcomed by small businesses, and indeed our own membership.  In the days of the app, I would be curious to know how the Treasury or HMRC draw the line between video-games and non-video-games though. It could be Jaffa cakes all over again.
• Similarly, the commitment to fast broadband access for the regions offers smaller businesses substantial opportunities, although we should note that successive Budgets have promised this for some time now and the mere mention of superfast broadband hit a wall of cynicism on Twitter.
• Although small businesses will be unaffected by plans to reduce corporation tax, those with aspirations of growth will be encouraged as the small business and overall tax rates gradually converge.
• SMEs are more likely than large businesses to employ low earners and so will welcome the Chancellor’s aspiration of a £10,000 income tax threshold. It would be even more helpful, of course, if we knew when this is going to be delivered.
• Planning reform is welcome in all cases; planning was the costliest area of regulation for small businesses when such a comparison was last run so reform could release pent-up investment.
• Many other giveaways that seem aimed at large businesses will trickle down to SMEs: for instance the New UK Centre for Aerodynamics could be a good resource for the many smaller suppliers in that industry’s supply chain. Same goes for moves to make patents cheaper in the Life Sciences sector.
• We’re still waiting for serious progress reporting on the Enterprise Zones – we only vaguely know what they are meant to achieve. So it’s very hard to follow any budget statements about them.
• Finally, there is the notorious scrapping of the 50p rate. When the new top rate of 45p does kick in, it is possible that some businesses will benefit. In fact, the relative timing of announcement and introduction could provide some incentive for SME owners to plough earnings back into their businesses until the top rate falls. If that does occur, the Chancellor could see a well-timed boost to business investment – although more on that is discussed below.

Unfortunately this is still a collection of ad-hoc initiatives when the Chancellor should have been conscious of this Budget being part of the process of rebalancing the UK economy.

There was only a passing mention to the loan guarantee schemes with which the Government hopes to kick-start lending to small businesses. The National Loan Guarantee Scheme, which we have welcomed already, could end up guaranteeing £20bn of loans; I never thought it would feature so little in the Budget speech. Similarly, the reformed Enterprise Finance Guarantee will make it easier for SMEs to access guarantees and harder for banks to explain not using the programme. Perhaps on the day the 50p tax rate was scrapped the Government didn’t want to leave itself open to accusations that it is giving money to the banks through guarantees (though in fairness it isn’t).

The economics of the Budget are still discouraging but there are some parts worth celebrating, including the extra cash the Chancellor has managed to salvage from reducing the deficit ahead of schedule.

Moreover, the decision to issue 100-yr gilts and perpetuities could prove to be inspired. The UK state finances are nowhere near as bulletproof as the country’s AAA-rating would suggest and yet the very long maturity of British Government debt has shielded the country from capital market scrutiny. This advantage (which the Chancellor would have acknowledged if this were politically possible) must be maintained.

Some of the growth forecasts the Budget relied on have puzzled me, however. No, it’s not the slightly improved growth prospects forecast by the OBR that I take issue with; oddly enough our Global Economic Conditions Survey tells me much the same thing.

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Rather, as the EEF’s economists were first to point out, it is the estimates on business investment that are extremely puzzling. You can read them for yourselves on pg. 104 here. Now business investment is notoriously volatile but even so, how the Chancellor or the OBR expect it to go from negative or zero for the last three years to 6.4% in 2013 and 10.1% by 2016 I don’t understand.

	2010	2011	2012	2013	2014	2015	2016
Fixed investment	3.1	-1.7	-0.3	6.2	8.6	8.9	8.7
Of which Business	-2.1	0.2	0.7	6.4	8.9	10.2	10.1